Dataquest spoke to the chief financial officers of some of India's leading technology services companies, and asked them about their policies and practices. In a harsh, competitive environment where companies are facing tremendous challenges of scale, the role of finance is more critical than ever. Which is why these CFOs have a big part to play in the success of their companies.

DATAQUEST: How do you handle project costing?
Suresh K Senapati: In Wipro's IT Services business, we have models that define the pricing structure taking into account various project-specific factors. A few factors that we consider are: the type and tenure of the project, geography of the customer, various phases of the project, resource cost, namely skill sets and experience mix of resources and overheads.

V Srinivas: Satyam's system of costing depends upon the type of project, geography and industry.  In a matured geography, we use marginal costing and in emerging/evolving geography/industry, we use absorption costing. However, for pricing purposes, investments are amortized over a period of time.

Sandeep Kanwar: HCL Infosystems has a cross-functional team that works on large projects/bids. The team is responsible for analysing the risks involved in the project, preparing a comprehensive cost sheet, negotiation with the vendors, preparation of financial evaluation model using concepts like IRR, MIRR, NPV, discounted payback etc and cash flow projections. This role is of critical importance to the company, and internal processes are followed rigorously.

V Balakrishnan: Infosys has a project-based costing system. All projects undergo resource requirement estimation and a review process; plan for the effort and materials required; and budget for the total cost of executing the project. A technology-based platform is used in this exercise across the various divisions of the company worldwide and is a real-time system. The system enables us to cost and price individual projects, track the progress of projects both on financial and non-financial parameters and manage deliverables. It also helps us resource allocation decisions, facilitate quality control, assist in monitoring actual performance against budgets, carry out performance evaluation and more importantly, monitor and manage risks at the project level.

SL Narayanan: HCL Technologies uses standard costing for most projects, with very conservative norms on parameters such as utilization to provide for a margin of safety. We also assume a certain element of overheads on top of direct costs like salaries. However, in certain cases, where we do have some operating leverage, we do resort to marginal costing. Under marginal costing, we do not absorb any part of the overheads to arrive at the fully loaded price.  A third variant is when we get into a strategic relationship with certain clients and such cases will go through a mix of both absorption and marginal costing, depending on specific facts and circumstances. The objective of costing is to maintain a good balance between market share and profitability ie our ability to win new business without any severe adverse impacts to current operating margins.

S Mahalingam: Costing of projects in the company involves detailed exercise on requirements of various resources-manpower, software, hardware and other project-specific expenses. Some of the items of costs are ascertained by applying the standard costing system. Certain other elements, such as hardware, are evaluated on the basis of cost estimation from vendors.  At the time of execution of the projects, tracking of revenue and costs are done project-wise. The variances, if any, are identified and reviewed at the level of respective responsibility centers. The process, on one hand, provides a standardized methodology and costs to the sales team, while on the other hand, monitors the performance at the time of execution at the level of responsibility centers. The methodology for revenue recognition has been disclosed in our quarterly and annual accounts.

How do you monitor the financial status of projects, against milestones?
Suresh K Senapati: Wipro follows standard accounting norms, where revenue is recognized on the basis of efforts spent in the project. At the point of entering into a contract with a customer, we set internal targets with respect to achievements, and monitor them on an ongoing basis. This happens with the help of an internal tool, which tracks both efforts and deliverables.

The planned efforts for a fixed price project are measured continuously against the actual effort spent till the time of measurement.

V Srinivas: For Satyam, individual projects or a set of projects are grouped to form full life cycle businesses (FLCBs).  The performance of the leader of the project is assessed based on the performance of the FLCB. An automated application facilitates the leaders to monitor the financial health of the projects and customers. We presently follow an internally developed contribution approach based on standard costing principles for project monitoring. The main feature of this model is that it enables us to focus on the key cost elements in a project. The reports are self-explanatory and are easily comprehendible by the technical associates (project managers) enabling quicker decisions to make the projects more profitable.

Sandeep Kanwar: At HCL Insys, large projects are monitored internally, on a continued basis. This is done to ensure project implementation as per plan and the costs are kept at or below the planned level. Revenue and cost of every project is tracked at regular intervals and compared with planned revenue and cost. This helps in taking necessary corrective actions in time.

V Balakrishnan: Infosys has a real-time based project profitability reporting system, which facilitates review of progress and delivery of project as also the actual profitability with planned profitability.

SL Narayanan: HCL Tech has a pre-sale bid management team that estimates the effort, and interacts with the sales team at the time of client negotiations. Post sign-off, there is a project monitoring cell that reviews projects on a weekly, fortnightly and monthly basis based on its size. Larger the project, shorter the time interval. In these reviews, the percentage of project completion and man-hours spent are compared and corrective actions taken, if required.

S Mahalingam: TCS has adopted a process whereby the economic value added (EVA) of each project is evaluated periodically. The people responsible for delivery are closely monitored in terms of fluctuation in EVA vis-a-vis the budget.  Also, EVA is used as a determining factor for the variable component of pay for the employees. In addition to the measurement of EVA at the project level, geography level and customer level, the drivers for revenues and costs are also measured and reviewed. In addition to profitability, therefore, the review process involves analysis of various items in the balanced scorecard at various levels.

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